Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Year: 2021

THE DAILY EDGE: 1 SEPTEMBER 2021

Small Business Job Growth Continues to Accelerate in August

We will get the BLS employment report Friday. Here’s IHS Markit’s Small Business Employment report:

National job growth continued to rise significantly in August, according to aggregated payroll data of approximately 350,000 clients provided by Paychex. The data released in the latest report of the Paychex | IHS Markit Small Business Employment Watch shows the Small Business Jobs Index gained 0.45 percent in August. At 99.80, the national index has increased 5.74 percent during the past 12 months, representing a record-high year-over-year growth rate. Hourly earnings growth increased to 3.42 percent in August, its third consecutive gain.

“The Small Business Jobs Index reached its highest level since January 2018,” said James Diffley, chief regional economist at IHS Markit. “The national index climbed 1.56 percent in the quarter to 99.80.” (…)

In further detail, the August report showed:

  • Leisure and hospitality continued its recovery in August with its employment index surging to 101.90, up 14.61 percent since August 2020.
  • Hourly earnings growth is up 8.36 percent since last year in leisure and hospitality.
  • All regions of the U.S. had sizable employment gains in August. The South remains the leader in small business job growth.

Paychex business solutions reach 1 in 12 American private-sector employees, making the Small Business Jobs Index report an industry benchmark. The national jobs index uses a 12-month same-store methodology to gauge small business employment trends on a national, regional, state, metro, and industry basis.

National Wage Report

  • Hourly earnings growth increased to 3.42 percent in August, its third consecutive increase. One-month annualized growth surpassed four percent for the fourth straight month, indicating stronger growth in recent months.
  • Weekly earnings growth also improved in August, though only slightly (2.48 percent) with weekly hours worked continuing to slow.
  • Weekly hours worked growth (-0.75 percent) has posted negative year-over-year growth since May.

Pointing up The most interesting part of the report is in the hourly wage data. The 12-m growth rate of 3.4% in August is up only slightly from +3.0% in January 2020, before the pandemic. But it reached +4.7% annualized in the last 3 months. All major industries are in sharp acceleration

12-Month Growthimage

3-Month Annualized Growthimage

Jay Powell last Friday (my emphasis):

(…) if wage increases were to move materially and persistently above the levels of productivity gains and inflation, businesses would likely pass those increases on to customers, a process that could become the sort of “wage–price spiral” seen at times in the past. Today we see little evidence of wage increases that might threaten excessive inflation. Broad-based measures of wages that adjust for compositional changes in the labor force, such as the employment cost index and the Atlanta Wage Growth Tracker, show wages moving up at a pace that appears consistent with our longer-term inflation objective. We will continue to monitor this carefully. Fingers crossed

Today:

  • Walmart to hire 20,000 supply chain workers ahead of holiday season The average wage for supply chain workers would be $20.37 per hour, the statement added, which compares with the company’s announcement of $15.25 an hour average wage pay in February. (Reuters)
  • Morgan Stanley boosted salaries for the second time in a month. Junior bankers will get $110,000, a mark that will now also cover first-year staff in the trading division, according to a person familiar. Meantime, Fidelity plans to hire 9,000 new workers across the U.S. by year-end. (Bloomberg)
  • Wilcox, the owner of the childcare centers in New Orleans, increased hourly wages for all of her staff this spring, going from a range of $10 to $13 per hour to a range of $12 to $16. But she still hasn’t been able to fill all of her openings. (Reuters)
Europe’s Latest Inflation Surprise Maybe it’s time for a global response to a global problem.

By the WSJ Editorial Board

(…) As in the U.S. and United Kingdom, the usual suspects are emerging to argue eurozone inflation will be transitory. For Europe, these allegedly temporary factors are a shortage of agricultural labor, surging demand for services such as tourism, a temporary German consumption-tax cut last year setting a deceptive baseline, and so on.

A political problem for ECB President Christine Lagarde is that inflation isn’t evenly distributed across the eurozone. Prices rose 4.7% in Belgium, 3.4% in inflation-hawk Germany, and 2.7% in the Netherlands—but a below-target 1.3% in Portugal and 1.2% in Greece. Inflation is supposed to help southern European economies devalue their way to prosperity on the sly, yet the economies that have inflation are those where it’s most politically toxic. (…)

If inflation turns out to be persistent, Ms. Lagarde will need to abandon the ECB’s exceptionally loose policies. That includes the quantitative easing program of bond purchases that has become the ECB’s main tool for suppressing government borrowing costs. The ECB absorbed all of Italy’s net bond issuance in 2020, the Institute of International Finance estimates. Only this program—which may be inflationary—can shield Italy from the interest-rate ravages of more inflation.

Tuesday’s news underscores that the current burst of inflation is global. Monetary authorities increasingly seem to treat this as an excuse to keep current policies—“But Mom, everyone else is doing it!”—rather than a warning. No one wants to discuss whether central bankers should start coordinating an exit from their Covid crisis policies.

Instead they delay for fear of being the first mover, or they pretend they’re starting to tighten when they’re not. Expect Ms. Lagarde to take her turn at passing the hot potato of global monetary leadership. We had hoped this go-it-alone impulse would turn out to be transitory, but so far it is proving to be all too well-anchored.

(If you missed the EU inflation data yesterday, THE DAILY EDGE: 31 AUGUST 2021)

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MANUFACTURING PMIs

Eurozone manufacturing growth slows to six-month low in August

The euro area manufacturing sector registered another marked expansion during August, latest PMI® data showed, although momentum waned once again as the headline index fell to a six-month low. The final reading of the IHS Markit Eurozone Manufacturing PMI for August of 61.4 was fractionally lower than the earlier ‘flash’ print of 61.5, and down from 62.8 in July. This marked a second successive month in which growth has slowed in the sector since June’s survey-record expansion.

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All three sub-sectors registered sharp, albeit weaker, improvements in operating conditions over the month. Growth at investment goods makers continued to lead over consumer goods and intermediate goods producers, as has been the case in each of the past 12 months.

imageOf the monitored euro area constituents, the Netherlands once again saw the strongest improvement in manufacturing business conditions, despite growth here slowing to a five-month low. Softer expansions were also recorded in Germany, Ireland, Austria and France.

August survey data were particularly notable in Greece, which registered the highest reading in its Manufacturing PMI since April 2000. Meanwhile, Italy and Spain also observed accelerated expansions.

Goods production across the eurozone continued to expand in August, as has been the case in each month since July 2020. Although the pace of growth was the weakest in six months, it was still sharp overall and well above the historical average.

Supporting robust production schedules were continued improvements in demand for euro area goods. Total new orders increased for a fourteenth straight month in August, while new export business also grew at a marked rate. The Netherlands, Germany and Italy performed particularly well on the export front. However, the overall rate of growth in export demand across the eurozone lost momentum in August.

There were clear signs of strong capacity constraints at eurozone manufacturers as work-in-hand increased at a rate that was historically unmatched when compared to anything seen prior to March of this year. This came despite firms once again depleting inventories of finished goods from warehouses to fulfil orders.

To boost output capabilities, manufacturers added to their workforce numbers in August, continuing the employment growth trend which started in February and with the rate of job creation down only modestly from July’s all-time high.

Elsewhere, supplier delivery times lengthened to a considerable extent once again in August amid strong demand for production materials and inputs, though the rate of lengthening eased slightly further from May’s record. Latest data showed firms increasing their buying activity sharply during August. For the first time since January 2019, inventories of purchased items increased, albeit only mildly.

Meanwhile, price pressures remained stubbornly elevated midway through the third quarter. Input costs increased substantially once again amid ongoing supply chain issues and strong input demand. However, latest data showed the first slowdown in cost inflation since input prices started rising again in August 2020.

A similar trend was observed in output charges, where the rate of inflation remained historically steep after July’s survey high, but eased for the first time since January.

Lastly, euro area manufacturers recorded an optimistic outlook towards the next 12 months during August. The level of positive sentiment was strong, but eased for the second consecutive month to reach its lowest since November 2020.

China: Business conditions deteriorate slightly in August

Chinese manufacturers signalled a slight deterioration in business conditions in August, driven by a renewed drop in output and a further fall in new work. Panellists often stated that the resurgence of the COVID-19 virus at home and abroad had weighed on the sector’s performance. Restrictions to contain the virus also impacted supplier performance, which deteriorated solidly, while shortages led to steeper rises in cost burdens and prices charged. At the same time, subdued market demand led firms to trim their purchasing activity and payroll numbers slightly.

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) posted below the neutral 50.0 level at 49.2 in August, down from 50.3 in July, to signal a deterioration in the health of the sector. Though only marginal, it was the first time that business conditions had worsened since April 2020, with the index dipping to its lowest level for a year-and-a-half.

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Chinese goods producers recorded the first fall in output since February 2020 in August. Survey respondents frequently mentioned that the recent uptick in COVID-19 cases and subsequent restrictions had impacted production, dampened demand and led to greater difficulties sourcing inputs.

Total new work fell for the second month in a row and, though only mild, the reduction was the fastest seen since April 2020. Panellists commented on relatively muted demand both at home and overseas amid a resurgence of the COVID-19 pandemic. New export orders declined for the first time since February, albeit modestly.

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Companies registered a fractional fall in employment during August, after payrolls were broadly unchanged in July. Some firms mentioned reducing their staff numbers due to reduced output requirements. Consequently, backlogs of work increased again, and at the fastest rate since May.

Lower production requirements led to a renewed fall in purchasing activity in August. That said, the rate of decline was only marginal. At the same time, stocks of purchased items fell for the second month in a row. Inventories of finished goods meanwhile rose for the first time in six months, albeit only slightly, as some firms cited difficulties in shipping goods to clients and muted sales.

Supplier performance deteriorated again in August. Lead times increased to the greatest extent since February and solidly overall, as firms reported logistical delays due to the pandemic and relatively low stock levels at vendors.

Higher raw material prices and greater transportation costs drove a further marked rise in overall input prices. The rate of cost inflation picked up for the first time in three months and was sharp overall. At the same time, factory gate prices rose only modestly, despite the rate of increase picking up since July. Some surveyed manufacturers said demand was sluggish due to the pandemic and their ability to pass rising costs onto clients was limited.

Business confidence remained strong overall, albeit with the overall degree of optimism unchanged from July’s 15-month low. Concerns over how long the pandemic will take to be brought under control globally weighed on overall sentiment.

ASEAN: Manufacturing downturn continues into August

The ASEAN manufacturing sector remained in a downturn during August, according to the latest IHS Markit Purchasing Managers’ Index (PMI™) data, as rising COVID-19 cases and lockdown measures continued to impact the sector. Operating conditions declined sharply again amid further rapid falls in factory production and new orders, while sentiment among goods producers towards output over the year ahead slipped to a 13-month low.

The headline PMI posted 44.5 in August, down slightly from July’s reading of 44.6, to signal a third straight monthly deterioration in the health of the ASEAN manufacturing sector and one that was sharp overall.

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For the first time since May 2020, each of the seven constituent nations recorded deteriorations in conditions during August. The steepest pace of contraction was seen in Myanmar, where the PMI (36.5) remained among the lowest on record. This was followed by Vietnam, where the headline index (40.2) fell to the lowest since April 2020 amid the ongoing COVID-19 outbreak.

Elsewhere, sustained deteriorations were recorded in Malaysia and Indonesia, although both saw the rates of decline ease from July. Nonetheless, the latest PMI readings of 43.4 and 43.7, were indicative of sharp deteriorations in the health of the respective manufacturing sectors.

Renewed contractions were meanwhile registered in Singapore and the Philippines. In the former, the headline index (44.3) moderated noticeably from July’s more than eight year high, and sunk to the lowest since last September. In the Philippines, the latest reading (46.4) signalled the first deterioration in conditions since May and one that was the sharpest for 15 months.

Finally, Thailand’s PMI dipped further below the 50.0 mark in August. At 48.3, the latest reading signalled the quickest rate of decline for three months, but one that was only marginal.

Overall, the ASEAN manufacturing sector remained firmly in contraction territory in August. Output and new orders fell for the third straight month, with the rates of decline little-changed since July and among the strongest on record, reflecting ongoing challenges posed by the reintroduction of stricter containment measures. Foreign demand also weakened during August, as new export orders decreased for the third month in a row and markedly, although the rate of reduction did ease since July.

As a result, ASEAN goods producers pared back on their purchasing again in August, extending the current sequence of declining buying activity which began in June. The rate of reduction was marked, despite slowing on the month. Subsequently, inventories declined further. Nonetheless, supply chain disruption remained substantial. Although delays were slightly less severe than in July, lead times for inputs lengthened to one of the greatest degrees on record.

Meanwhile, goods producers continued to trim their workforces in August, extending the current sequence of falling employment which began in June 2019. The rate of job shedding eased on the month, but was still strong overall. August data also highlighted sustained capacity pressures, as backlogs of work rose at a series record pace.

Inflationary pressures also remained elevated. Input costs increased markedly again, with firms raising their average charges at an accelerated pace as a result.

The continued downturn also weighed on business confidence during August. Although still optimistic overall, the level of positive sentiment towards output over the next year dipped to the weakest since June 2020 and was historically muted.

Japan: Softer expansion in manufacturing output inAugust

The Japanese manufacturing sector registered a slightly softer improvement in operating conditions in August, according to the latest PMI® data. Firms reported slower expansions in both production and incoming business, with the latter increasing at the softest pace since January. Manufacturers often noted that rising COVID-19 cases both domestically and in South East Asia had dampened output and demand. As such, new export orders saw a renewed decline, the first since the start of the year. At the same time, supply chain disruption continued to hamper manufacturing activity across Japan, as firms noted the strongest deterioration in average lead times since the 2011 earthquake and tsunami.

At 52.7 in August, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) dipped from 53.0 in July. This indicated a softer improvement in the health of the sector, reflecting the continued impact of the COVID-19 pandemic on the Japanese manufacturing sector.

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The lower reading in the headline index was partly the result of a softer rise in output levels. Production increased for the seventh successive month, though growth eased to a marginal pace overall. Firms linked ongoing growth to a sustained rise in new orders, though noted that a surge in COVID-19 cases and lack of raw materials and hindered production.

New orders also rose in the latest survey period, though the pace of expansion was the weakest recorded since January. According to anecdotal evidence, client confidence was dampened by the extension of virus restrictions in domestic and international markets. Moreover, new export sales fell into contraction territory for the first time since the start of the year as COVID-19 cases rose across the Asia-Pacific region.

More positively, employment rose for the fifth month running in August. The rate of job creation quickened from July and was the fastest recorded since January 2020. Firms noted that headcounts were increased in preparation for higher production requirements.

Reflecting increased new orders, outstanding business rose for the sixth successive month. Manufacturers commented that a lack of raw materials had disrupted the ability to complete existing orders.

In line with slowing growth of output and new orders, buying activity rose at the softest pace in the current six-month sequence of growth. Japanese manufacturers noted ongoing difficulties in sourcing and receiving inputs due to material shortages and global COVID-19 restrictions, as evidenced by supplier delivery times lengthening to the greatest extent since April 2011. As a result, businesses reported that orders were fulfilled using existing stocks of finished goods.

There were continued reports that rising raw material prices placed further pressure on average cost burdens at Japanese goods producers during August. Input prices have now risen in each of the last 15 months and, while the rate of inflation softened from July, it remained rapid overall. Output prices meanwhile increased for the ninth consecutive month, and at the quickest pace since October 2018 as firms sought to partially pass on higher costs to clients.

Finally, business confidence regarding activity over the coming 12 months eased in August. Sentiment was positive overall, but at its lowest level for seven months as firms cited uncertainty regarding the duration of the pandemic. Nonetheless, manufacturers were confident that a broad-based recovery would occur once the pandemic subsided.

U.S. Home-Price Growth Rose to Record in June The Case-Shiller index rose 18.6% in the year that ended in June, as robust demand continued to outpace the number of homes on the market.

(…) Active listings in the four weeks ended Aug. 22 were up 16% from their recent low in the four weeks ended in March but still down 23% from a year earlier, according to real-estate brokerage Redfin Corp. (…)

Pending home sales fell 1.8% during July (-8.5% y/y) following a 2.0% June decline, revised from -1.9%. The Realtors Association reports that purchases continue to be restrained by a limited supply of homes for sale.

The July sales decline was largest in the Northeast where sales fell 6.6% (-16.9% y/y) after improving 0.5% in June. Sales in the Midwest weakened 3.3% (-8.5% y/y) after a 0.5% June increase. In the South, sales eased 0.9% last month (-6.7% y/y) following a 3.2% drop in June. To the upside, sales in the West improved 1.9% (-5.7% y/y) after falling 4.0% in June.

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Redfin’s Key housing market takeaways for 400+ U.S. metro areas

Through August 22:

  • Pending home sales were up 10% year over year. Pending sales were down 6% from their 2021 peak during the four-week period ending May 30.

  • New listings of homes for sale were nearly flat (+1%) from a year earlier. The number of homes being listed is in a typical seasonal decline, down 9% from the 2021 peak during the four-week period ending June 27.

  • Active listings (the number of homes listed for sale at any point during the period) fell 23% from 2020—the smallest decline since the four-week period ending September 20, 2020. Active listings are up 16% since their 2021 low during the four-week period ending March 7, but have declined 1% from their 2021 peak during the four-week period ending August 8.

  • 49% of homes that went under contract had an accepted offer within the first two weeks on the market, above the 44% rate during the same period a year ago, but down 8 percentage points from the 2021 peak, set during the four-week period ending March 28.

  • 35% of homes that went under contract had an accepted offer within one week of hitting the market, up from 32% during the same period a year earlier, but down 8 percentage points from the 2021 peak during the four-week period ending March 28.

  • Homes that sold were on the market for a median of 18 days, up from the all-time low of 15 days seen in late June and July, and down from 34 days a year earlier.

  • 52% of homes sold above list price, up from 32% a year earlier. This measure has been falling since the four-week period ending July 11 when it peaked at 55%.

  • On average 5.1% of homes for sale each week had a price drop, up 1.5 percentage points from the same time in 2020, and the highest level since the four-week period ending October 13, 2019.

  • The average sale-to-list price ratio, which measures how close homes are selling to their asking prices, decreased to 101.6%. In other words, the average home sold for 1.6% above its asking price. This measure is down 0.6 percentage points from its peak during the four-week period ending July 11 and up 2.5 percentage points from a year earlier.
  • From January 1 to August 22, home tours went up 11%, compared to a 30% increase over the same period last year according to home tour technology company ShowingTime.
  • During the week ending August 22, the seasonally adjusted Redfin Homebuyer Demand Index—a measure of requests for home tours and other services from Redfin agents—edged up slightly from the previous week to its highest point since the week ending April 11, and was up 20% from a year earlier.

Lots of charts here.

China Evergrande Warns of Possible Default Cash-strapped real-estate developer posts 29% drop in profit for first half of this year

Cash-strapped China Evergrande Group said work has been suspended on some of its real-estate projects after it delayed payments to its suppliers and contractors, showing how the developer’s financial troubles have spilled over into its business operations.

The highly indebted company on Tuesday also warned for the first time that it may default on its borrowings if it can’t resolve its liquidity problems. (…)

The company’s core property business lost $634 million during the period after it sold many apartments at heavily discounted prices. Evergrande said the average delivered price of its apartments fell 11.2% from a year ago, and revenue from property development declined nearly 19%. (…)

The Shenzhen-based group said it had the equivalent of about $88 billion in borrowings at the end of June, 42% of which come due in less than a year. It disposed of $2.2 billion worth of assets in the first half. (…)

The EV business, China Evergrande New Energy Vehicle Group Ltd., a day earlier warned that its plans to start mass producing cars might be delayed if it can’t raise additional capital in the short term. Its shares have plummeted nearly 80% in the year-to-date, giving the company a market capitalization of about $7.4 billion.

The company, which once had ambitions of rivaling Tesla Inc., said its loss for the six months to June more than doubled from a year ago, and it reported just $5.7 million in revenue from its new energy vehicle division. Like its parent, the business has also delayed payments to some suppliers and contractors, and is at risk of defaulting on its loans, it said.

Did you know that?

China’s home ownership rate was 90% in 2020, far higher than the global average of 69%, which makes it difficult for cities to contain price increases and speculation in the market, according to Li. In Germany, the rate was only 43%, while 57% of households lived in rented houses, he said. China needs to create an effective rental market, he added. (Bloomberg)

Desperately searching equity weakness

There is an emerging divergence between the broad market and the popular averages. The chart shows the Value Line Arithmetic Composite Index, which consists of about 1700 equally weighted stocks, has flattened out for months, while the popular averages have continued to surge, led by a few large-cap growth names. Similarly, the Russell 2000 Index has also stalled this year, with the index having gone literally sideways. It is not immediately clear whether the Russell 2000 has any predictive power for SPX, but what is clear is that the divergence between the two indices for nearly nine months is rare. The last time such a sustained divergence occurred was in the second half of the 1990s when the technology mania was running amok.

Google, Apple Hit by Law Ending Dominance Over App Payments The companies will have to open their app stores to alternative payment systems in South Korea under newly passed legislation there, threatening their lucrative commissions on digital sales.
Pointing up Didi and JD.com workers get unions in watershed moment for China’s tech sector

Chinese ride-hailing giant Didi Global Inc (DIDI.N) has set up a union for its staff while e-commerce powerhouse JD.com (9618.HK) has also established one – landmark moves in the country’s tech sector where organised labour is extremely rare.

Regulators in China have come down hard on its biggest technology firms this year, criticising them for policies that exploit workers and infringe on consumer rights in addition to unleashing a slew of anti-trust probes and fines.

The government is also encouraging companies to implement initiatives to share wealth as part of a recent “common prosperity” drive laid out by President Xi Jinping to ease inequality in the world’s second-largest economy.

Didi’s union, announced on an internal forum last month, will be initially managed by employees at its Beijing headquarters and will be guided by the government-backed All China Federation of Trade Unions (ACTFU), said two people familiar with matter. (…)

Didi and JD.com are believed to be the biggest tech firms to date to have established company-wide unions, though authorities in the county of Shishou in China’s Hubei province said in June that local subsidiaries of Meituan (3690.HK) and Alibaba’s (9988.HK) Ele.me had established unions. (…)

COVID-19
  • Two-Thirds in U.S. Now Say COVID-19 Situation Worsening The percentage of Americans who say the coronavirus situation in the U.S. is getting worse has surged to 68% from 45% in July and 3% in June.
  • A third dose of Pfizer/BioNTech’s COVID-19 vaccine provides a 70+% reduction in the risk of infection, according to study of Israeli data. The study, which has not yet been peer-reviewed, did not look at the issue of severe disease. More time is needed for that, the researchers said. Fortune

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Data: Google Trends. Chart: Jared Whalen/Axios

THE DAILY EDGE: 31 AUGUST 2021

House Rents Pop as New Investors Pile In Would-be home buyers priced out of the sales market are finding little consolation when they turn instead to the single-family rental market.

Asking rents for houses rose nearly 13% for the year to date through July, the highest annual increase in the past five years as tracked by real-estate data company Yardi Matrix, which analyzed professionally managed properties. (…)

Price increases are more moderate for single-family tenants renewing their leases, said Haendel St. Juste, a real-estate securities analyst at Mizuho Securities USA. (…)

Apartment asking rents also have risen, but at a slower pace: 8.3% for the year to date through July, Yardi Matrix said. The difference partly reflects weaker demand in downtowns that lost population after Covid-19 hit, although those markets have rebounded in recent months. (…)

Investors purchased $87 billion in homes in the first half of 2021, according to real-estate company Redfin, including a record 68,000 houses in the second quarter. (…)

Deep-pocketed investors may have a hand in would-be buyer woes: one in six home sales went to an investor in the second quarter of 2021, according to Redfin. In Atlanta, Phoenix and Miami, it was one in four. (…)

Since June, Blackstone Group Inc., Invesco Ltd. and Goldman Sachs Group Inc. alone have committed more than $11 billion to the sector. Meanwhile, other companies are building rental homes from scratch. New houses meant to be rented instead of sold account for about 12% of single-family construction in 2021, said Doug Ressler, a researcher at Yardi.

Tricon Residential Inc., a publicly traded house owner, reported new lease rent increases of around 21% in July, a record for the company. The average hike was a more modest 5% for renewal tenants. In an August earnings call, Gary Berman, Tricon’s chief executive, said in some markets the company could fetch close to 10% rent increases for existing tenants if it didn’t intentionally “hold back.” (…)

Unfinished Tractors, Pickup Trucks Pile Up as Components Run Short Supply-chain problems are causing order backlogs and cutting into sales volumes for companies like Cleveland-Cliffs, Honeywell and Illinois Tool Works.

(…) Executives expect the shortages and delivery bottlenecks, exacerbated by overwhelmed transportation networks and a lack of workers, to stretch into the fall. The delays are costing manufacturers sales and pushing some companies to revamp the way they put together their products, executives said. (…)

The backlogs of unfinished products are starting to take a financial toll on some companies, even as they report higher sales and profits.

Honeywell International Inc. said its second-quarter revenue would have been $100 million to $200 million higher if the company’s supply chains weren’t constrained. The industrial conglomerate predicted last month that supply-chain problems will clip that much from revenue again during the current quarter, even as the company raised its sales and profit forecasts for 2021. (…)

Howmet Aerospace Inc., HWM -3.08% which makes aluminum wheels for heavy-duty trucks, said its second-quarter sales volume of wheels dropped 7% from the first quarter, as shortages of chips and other parts led truck manufacturers to scale back truck assembly. John Plant, co-CEO of Howmet, said the truck makers halted wheel orders on short notice, causing stocks of wheels at Howmet to increase unexpectedly.

“We’ve got all these wheels,” Mr. Plant said. “All of us are suffering different degrees of pain.” The company said it offset the sales slowdown by raising prices. (…)

Steelmaker Cleveland-Cliffs Inc. reported that its inventory of steel rose by about $300 million during the second quarter because shipments to automotive customers were 20% less than the company expected. Cliffs said it was able to redirect some of that steel to the spot market, where the company was able to sell it for higher prices than the auto makers typically pay under purchase contracts with the Cleveland-based steelmaker. (…)

Euro zone inflation surges to 10-year high, in big headache for ECB

Consumer prices in the 19 countries sharing the euro rose by 3% this month, after increasing by 2.2% in July, far above expectations for 2.7% and moving well clear of the ECB’s 2% target.

The increase was fuelled energy costs but food prices also surged, while there were also unusually large increases in the prices of industrial goods, said Eurostat, the EU’s statistics agency. (…)

The ECB argues that a slew of one-off factors related to the economy’s reopening after the COVID-19 pandemic account for the bulk of the inflation surge, and that price growth will quickly moderate early next year. (…)

Core inflation, however, also surged in August with inflation excluding volatile food and fuel prices accelerating to 1.6% from 0.9%, while an even narrower measure that also excludes alcohol and tobacco, rose to 1.6% from 0.7%. (…)

ING:

(…) Core inflation was subdued in July due to a shift in the sales period last year and some other, more minor statistical factors. The data is showing its true colours in August with a reading of 1.6%. The change in last year’s sales period and German VAT increase were the main drivers behind the jump in non-energy industrial goods prices from 0.7 to 2.7%. These effects are temporary and the increase in services inflation was much smaller, from 0.9 to 1.1%. Yes, price pressures are increasing, but August’s dramatic move does overstate the underlying inflation developments.

Headline inflation at 3% has not been seen since 2011. The elevated headline rate was due to the higher core rate and continued year-on-year growth in food as well as energy prices. The latter has been somewhat of a surprise in recent months, related to higher gas prices and continued growth in petrol prices despite Brent oil prices starting to level off. This has the potential to push headline inflation higher towards year end.

Despite the jump in core inflation and the further rise in headline inflation, this is not set to sway the ECB towards a more hawkish stance ahead of the September meeting next week. These were widely expected moves, although the magnitude is larger than most would have expected. Remember July though? ECB President Christine Lagarde repeatedly mentioned that the ECB would not act on temporary inflation. Today’s release will cause some sweaty palms but has not given much evidence of more structural high inflation. The macro projections presented at next week’s meeting will likely not have seen too much extra upward pressure yet.

This is not to say that there is no upside risk to the inflation outlook. The one big question mark is around the passthrough of the higher input and transport prices for goods, which has been moderate so far but the price pressures have become abnormal in recent months. The other is whether service sector reopenings will still cause price jumps like we saw for hairdressers after the first wave. We’re starting to see some evidence of that in restaurants and hotels, but not yet in package holidays. There is some evidence that this effect will start to become more prominent towards the end of the year, so hold tight: inflation has the potential to go higher from here.

Experience or senility?

David Rosenberg yesterday:

Age Bias? Without naming names, did you know that the mean and median age of the most vocal inflationists is nearly 70? This is the same group a decade ago lamenting the very same thing (when they were closer to 60). So they were in their 20s and just starting their career during that rare decade-long inflation breakout and clearly that experience is seared in their memory banks. Seems to be an age bias here on the big call of future massive inflation; busy fighting the last war, even if it was five decades ago.

PRODUCTIVITY VS EMPLOYMENT

QR codes replace service staff as pandemic spurs automation in US Shift means many jobs lost during Covid crisis will not return, say experts

Post-Pandemic Productivity Promises

From Andrew Cates:

Many economists are presently doing a lot of head scratching about the prospects for productivity growth. (…) Productivity growth will hold the key to how sustainable global growth is likely to be in the face of post-pandemic economic, policy and financial market pressures.

(…) there are a number of factors that are potentially positive for the productivity outlook in many of the world’s major economies in the immediate years ahead.

Firstly, productivity growth has already picked up pace in a number of major economies in recent months. To be sure there are some cyclical reasons for this that concern shifting sectoral spending patterns as well as the slump and subsequent rebound in economic activity that has unfolded as the COVID crisis began and then matured. Nevertheless, the strength of the current rebound in productivity growth is still impressive. And one reason for this could be that corporate investment activity has also been impressive, particularly in the technology space. Many CEOs and CFOs, moreover, expect to maintain high investment in this space in the period ahead. A survey by the World Economic Forum conducted during the course of 2020 and published last October, for example, indicated that between 85 and 95 percent of firms were accelerating or looking to accelerate the digitization of work processes as a result of COVID-19.

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Secondly – and a key driver of this additional capex – the COVID pandemic has generated shifts to behaviour that have necessitated an acceleration in digitization and automation. The modus operandi of many companies (as well as many households) has changed. As a result of this, potential productivity efficiencies that were lurking beneath the surface prior to the pandemic have been uncovered and magnified far more swiftly than might have been expected in the absence of the pandemic. The most obvious example of this is the breakthrough vaccine technology that was uncovered to fend off the virus, technology that may well trigger further efficiencies in health care in the coming months. But examples abound too in other areas of the healthcare sector (via online consultations), in construction (via the adoption of digital construction methods), in information and communications (via increased demand for digital services such as cloud computing and videoconferencing facilities), in retail (via an acceleration of e-commerce activity), and in banking (via a shift to digital channels and contactless payments).

That brings us neatly to the next factor, namely the sheer number of new technologies that could yield a productivity dividend in the period ahead. Sure, there has been much hype about these technologies in recent years with many even suggesting (somewhat prematurely) that they earmark the advent of a fourth industrial revolution. Everything from artificial intelligence and machine learning, biotechnology, nanotechnology, robotics, and 3D printing have been touted as “the next big thing.” Still, the sheer number of these intriguing technologies and the degree to which the pandemic may have now lit their fuse is potentially promising for how productivity growth evolves from here.

It’s important to note here, however, that the absence of a broadly-based productivity revival in the pre-pandemic years may have had little to do with technology. The reason instead could be linked to surplus labour market capacity and low real wages. A growing body of evidence increasingly suggests that low real wages played a significant role in driving productivity growth to weaker levels in the years after the financial crisis and prior to the pandemic. In other words when real wages were low and profit margins were high, firms had few incentives to deploy new technology and/or seek alternative ways of securing cost efficiencies.

The parallel view here is that low labour productivity growth in those years leading up to the pandemic may have simply been a symptom not of weak technology investment but of demand-constrained, cheap labour economies. Equally on this view it may now be no coincidence that labour productivity growth is rebounding as fiscal and monetary policy have been highly stimulative and as wage inflation has started to climb. Indeed with sources of labour supply not now as fertile as they used to be (thanks, for example, to de-globalisation and enduring pandemic-related restrictions) firms are arguably now more actively choosing to invest in and deploy new technologies that have a productivity dividend.

So what does all this mean for productivity trends going forward? (…) the median forecast from the survey of professional forecasters for the 10-year ahead growth rate of labour productivity has lately been lifted from a low of 1.35% in 2019 to 1.75% in the latest survey for 2021. In the view of this scribe, trend productivity growth in most major economies – the US, Euro Area, the UK and Japan – might improve by 0.5 to 1 percentage point over the next several years. That would be in tune with evidence from some academics and from surveys of CEOs and CFOs. It would additionally be sufficient to bring productivity trends in the OECD roughly back to where they stood prior to the financial crisis. (…)

I hope he’s right. However, saying “the strength of the current rebound in productivity growth is still impressive” may be right looking at his 9-year chart above, but it becomes less impressive looked at over a longer period:

fredgraph - 2021-08-31T071023.002

Productivity always rebounds post recessions but this year’s growth in output per hour (blue) is well below average, at least so far. Output per employee (red) is more in line with previous post-recession jumps but the unusual gap between the two series means that employees log in many more hours per week, likely unsustainable and not really a sign of improved productivity, especially if these extra hours are paid at premium wage rates.

As to the “acceleration in digitization and automation” and other tech investments, the growth numbers are also not all that impressive when compared to pre-1985 years:

fredgraph - 2021-08-31T072244.545

Only to say that the evidence for “Post-Pandemic Productivity Promises” is not compelling just yet.

Delta Variant Pummels China’s Services Sector China’s services sector suffered an unexpectedly severe blow in August as a wave of infections sparked new lockdowns across the country, sending an official gauge of nonmanufacturing activity into contractionary territory.

China’s official nonmanufacturing purchasing managers index, which tracks activity in the construction and services sectors, plummeted to 47.5 in August, from 53.3 the prior month, according to data released Tuesday by the National Bureau of Statistics, breaking through the 50 mark that separates expansion from contraction. (…)

Largely responsible for the drop in the nonmanufacturing measure was a significant fall in the services subindex, which slid to 45.2 in August from July’s 52.5, as the highly infectious Delta coronavirus variant dampened demand for services requiring close human-to-human contact, the statistics bureau said. (…)

Beijing’s manufacturing PMI dropped to 50.1 in August—down from the previous month’s 50.4 reading and falling short of the 50.2 median forecast expected by economists polled earlier by The Wall Street Journal.

(…) the subindex of new orders dropped to 49.6—the first contractionary reading since February 2020. At the same time, the subindex tracking new export orders dropped further to 46.7, for a fourth straight month in contractionary territory. (…)

Subindexes tracking employment in the manufacturing and nonmanufacturing sectors both weakened in August. (…)

ING:

Contraction in non-manufacturing activity comes from Covid and the clampdown on technology and education centres

For manufacturing activity, chip shortages are important, since production capacity for electronics is close to a bottleneck, if not already there. This affects production as well as export orders.

In contrast, the sudden contraction in the non-manufacturing sector comes from several parts of the economy.

  • Policies aimed at reforming the technology industry e.g. data privacy, and the clampdown on education centres to reduce the costs of raising children. Both of these have hit non-manufacturing activity.
  • The weakness of non-manufacturing activity also came from suspended port operations due to social distancing measures after some Covid cases were found in two ports and one airport in August.
  • People have deferred cross-provincial trips as they are worried about being under lockdown away from their home cities in case Covid cases are found in a tourist city.

Localised lockdowns from Covid and the suspension of ports and airports will be short-lived. Covid is subsiding in China and these measures should not affect manufacturing activity in a prolonged way unless new Covid cases are found again at ports.

But the chip shortage could be a problem that lingers on into at least 2022 and perhaps even into 2023 as chip manufacturers install more production lines. This is not going to happen overnight and will continue to affect the manufacturing PMI.

Some changes in the technology industry are happening, especially on data privacy after the clampdown. This could be positive for the industry. But shutting down tuition centres is hurting the jobs market. The most recent policy to cap the time spent on online games for youngsters may also create redundancies.

Consequently, we expect both manufacturing and non-manufacturing PMIs to be lower in the coming months. The contraction in non-manufacturing activity is likely to continue in September as the job market has become shakier and this will affect consumption.

As the government needs to find a way to support economic growth, infrastructure will likely be the first choice. The central bank will keep injecting liquidity into the financial system to suppress market interest rates so that local governments can fund infrastructure projects at a lower cost. This is in contrast to the Fed’s tapering talk. As such, we expect the yuan to weaken to 6.7 against the US dollar by the end of the year.

Delta Variant Threatens Small Businesses as It Slows Return-to-Office Plans Many big employers now intend to keep staffers home after Labor Day, in a new blow to the shops, retailers and restaurants that rely on them

(…) The survival of corner retail stores, coffee shops and restaurants is being watched closely by office-building owners, who are counting on traditional work patterns to resume as Covid-19 subsides. The success of the work-from-home trend threatens their cash flow and property values. (…)

An average of about 35% of the workforce had returned to traditional office space, as of July 21, in the 10 major cities monitored by Kastle Systems, a nationwide security company that monitors access-card swipes. That was up from about 23% in the middle of January.

More recently, though, momentum has stalled. As of Aug. 8, the average return-to-office rate had fallen to 33%, Kastle said. Summer vacations caused part of that decline. But the drop also likely reflects the growing number of businesses delaying return-to-office plans, analysts say. (…)

Many of the largest downtown office-building owners, including Boston Properties Inc. and SL Green Realty Corp. , have been compelled to find new ways to keep tenants viable, such as deals where ailing retailers pay a percentage of their monthly sales in rent rather than a fixed amount to help them survive. (…)

14-day trends:unnamed - 2021-08-31T080227.489

But the 7-day trends looks better:

(CalculatedRisk)

From NBF:image

Economic Surprises Turn Negative, Globally

(…) For the first time in over a year, Citi’s Global Economic Surprise Index turned negative.

Last week’s reading ended the 2nd-longest streak in positive territory in nearly 20 years. The only streak that exceeded the current one, or even came close, was the one following the recovery from the Great Financial Crisis.

The economy does not equal the market, especially when we’re dealing with stocks. But for the MSCI World Index (excluding the U.S.), forward returns were poor after the ends of positive economic surprises, especially over the next 3 months. (…)

Even though the Citi Global Economic Surprise Index just turned negative, the one focused on the U.S. is nearly -50. If we filter the table above to only include those signals when U.S. surprises were lagging the world, then the ratio of the Russell 3000 to the MSCI World Index tended to see losses. (…)

China Reins In Young Gamers The country’s new regulation bans minors from playing online videogames between Monday and Thursday and allows an hour of play on Fridays, weekends and holidays.

China on Monday issued strict new measures aimed at curbing what authorities describe as youth videogame addiction, which they blame for a host of societal ills, including distracting young people from school and family responsibilities. (…)

The government announcement said all online videogames will be required to connect to an “anti-addiction” system operated by the National Press and Publication Administration. The regulation, which takes effect on Wednesday, will require all users to register using their real names and government-issued identification documents.

(…) Tencent Holdings Ltd. , the world’s largest videogame company by revenue, has used a combination of technologies that, for example, automatically boot off players after a certain period and use facial-recognition technology to ensure that registered users are using their proper credentials. (…)

The impact on U.S. game makers from the government’s decision is expected to be somewhat limited, given their indirect exposure to the Chinese market. Beijing treats videogames as publications and imposes its censorship rules on videogames before they can be sold in China. (…)

What’s next? Porn, gaming?

The housing ministry aims to control growth in urban rents to no more than 5% per year, it said in a statement on Tuesday. It’s seeking to ensure a balanced supply and demand in the rental market.

The announcement underscores one of the top priorities for President Xi Jinping in his pursuit of “common prosperity.” Regulators are ratcheting up efforts to tame land and home prices that have fueled China’s runaway property industry.

The statement also addressed issues including improving public services and infrastructure, building good affordable rental housing, and ensuring urban development projects aren’t excessive or create a sudden surge in housing demand. (…)

Almost 64% of the population now live in cities, said Wang Menghui, minister of housing and urban-rural development. That’s up from 51.3% in 2011 and 10.6% in 1949, according to the statistics bureau.

China will stabilize land and home prices, as well as market expectations, to ensure the healthy development of the property sector, Vice Housing Minister Ni Hong said at the same briefing. (…)

The government recently halted land auctions in some major cities, potentially hurting a key source of cash for local governments. It has also stipulated that the price premium for land should be capped at 15%, Citigroup Inc. analysts including Griffin Chan wrote in an Aug. 11 note after market rumors about the policy change. (…)

The government needs to tread carefully as the real estate sector now accounts for 13% of the economy from just 5% in 1995, according to Marc Rubinstein, a former hedge fund manager who now writes about finance. (…)

China plans to tighten oversight of e-commerce companies like Alibaba Group Holding Ltd. and Pinduoduo Inc., including by holding them accountable for intellectual property violations.

E-commerce platforms will be restricted from online business operations or even have their licenses revoked if they fail to deal with serious violations of IP rights by vendors on their platforms, according to a draft revision of the country’s e-commerce law posted by the State Administration for Market Regulation. The market watchdog is seeking opinions on the draft revision until Oct. 14.

Chinese companies have long struggled with allegations that they allowed pirated or counterfeit goods to be trafficked through their websites. In 2019, the U.S. government added PDD to its Notorious Markets list for hosting pirated good, joining Alibaba and other Chinese firms under that label.

PDD and Alibaba’s Taobao were also on the 2020 list, released in January. (…)

Alibaba co-founder Jack Ma once said that it was difficult to root out fake goods on the company’s platforms because they were so high quality.

“The problem is that the fake products today, they make better quality, better prices than the real products, the real names,” he said at the time.

George Soros: Investors in Xi’s China face a rude awakening The leader’s crackdown on private enterprise shows he does not understand the market economy

(…) [Xi] is putting in place an updated version of Mao Zedong’s party. No investor has any experience of that China because there were no stock markets in Mao’s time. Hence the rude awakening that awaits them.

(…) The academic Yi Fuxian goes one step further than Hass. He believes China’s “demographic structure is actually much worse than the authorities would have us believe.” An extensive analysis of the country’s “age structure” suggests that China has considerably fewer citizens than is currently being reported. In fact, China’s population might be as low as “1.28 billion,” which would make India the most populous country in the world. What we view as “a fire-breathing dragon,” writes Fuxian, is little more than “really a sick lizard.”

With a shrinking, rapidly aging population, the Chinese regime appears to be doing everything in its power to hide its gaping wounds. But the charade can’t go on forever. Although the propaganda machine roars on, the world is starting to see China for what it really is. Behind all the five-year plans, huge investments in infrastructure, and bombastic rhetoric lies problems that are existential in nature. Dragons are, after all, a thing of fantasy, much like the Chinese regime’s dreams of world domination.